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Sunday, October 25, 2015

Mega-regionals: What Is Going on?

Mega-regionals: What
Is Going on?

Introduction

A lot is happening on the trade negotiations front in almost
every corner of the world. Countries have been active and
prolific at the bilateral and regional levels for some time – 432
RTAs have been notified to the WTO. But the key ongoing
negotiations are of a different dimension: they involve more
partners, from different levels of development and different
regions, covering larger volumes of trade, and aiming at
reaching agreements of a deeper nature on a wide scope
of issues. These are the mega-regionals, of which the
Trans-Pacific Partnership and the Trans-Atlantic Trade and
Investment Partnership are in a category of their own by virtue
of their scope and impact.
If current negotiations are successful, new rules will shape
trade and investment flows, underpin global governance on
21st century trade issues and facilitate the proliferation of
global value chains. Their purported emphasis on promoting
broad liberalization, reducing non-tariff barriers and addressing
regulatory hurdles through greater convergence would unleash
new opportunities and bring about more growth to the
world economy.

They may also contribute to bringing more
dynamism to the multilateral trading system, spearheading a
virtuous circle of enhanced rule making and trade liberalization.
Or they may not. Much will depend on the specific provisions
to be agreed upon and the type of preference they will create.

Not all preferences are equal.

Some of them carry a larger
potential for discrimination than others. The greater their
discriminatory nature, the higher the friction and fragmentation
risks they entail. On the contrary, provisions with low or no
discriminatory potential actually may be quite beneficial for
non-members.
This is no minor issue. While mega-regional negotiations
encompass a large number of countries, they exclude an
even larger group. About 160 nations, home to over 80% of
the world’s population, are sitting on the sidelines while these
discussions take place. The way in which countries choose to
react to these developments may determine, at least in part,
the impact of these pacts on individual non-members and
on different regions, as well as on countries that are party to
the mega-regionals. The broader question of the geopolitical
impact that mega-regionals may have in today’s world is an
issue that demands great reflection.
The multilateral trading system is not exempt from the impact
of mega-regionals. Much will depend on the specifics of the
agreements that are finally concluded, and in particular on whether they are crafted with an inclusive perspective and are
open to new members. Much will also depend on whether
WTO members opt to advance an ambitious post-Bali
multilateral agenda, which could include plurilateral agreements
as a way to proceed in consolidating the WTO’s centrality.

All of this presumes that mega-regionals will come to fruition
as planned, but this cannot be taken for granted. There are
big negotiating challenges ahead, and domestic political
divisions in participating countries to be bridged. If the megaregionals
fail, the consequences on the potential of trade and
investment to continue driving world growth and prosperity will
be considerable.
While there is a lot of uncertainty regarding the future and
impact of mega-regional agreements, it is clear that this is the
topic of choice in the global trade agenda today.

This is why
the World Economic Forum’s Global Agenda Council on Trade
& Foreign Direct Investment decided to dedicate its work this
year to Mega-regional Trade Agreements: Game-Changers or
Costly Distractions for the World Trading System?
Extensive discussions, with the participation of all Council
Members, showed that this is a rich subject that poses
important questions and ignites strong debates. A consensus
was not reached on all its angles, nor was that the main
purpose. Instead, the aim was to explore the impact that
mega-regionals may have on non-members, highlighting
opportunities and challenges in promoting the coexistence
of these agreements – should they materialize – with the
multilateral trading system.

With all the uncertainties and caveats surrounding the
negotiation of mega-regional agreements, there is a strong
case to be made on the importance of consciously working
to facilitate the relationship between them and the multilateral
trading system, for the benefit of all countries.

The Impact of Mega-regionals

For decades, but with particular impetus since the inception
of the World Trade Organization in 1995, many of the
WTO’s members have enthusiastically embarked in selective
associations with other members, aimed at more deeply
integrating their economies. These schemes vary in nature,
scope and effectiveness and range from free trade agreements
to custom unions to common markets.
The General Agreement on Tariffs and Trade (GATT) defines
free trade areas as those in which two or more custom
territories agree to eliminate duties and other restrictions
“on substantially all the trade” between them on products
originating in their territories.

Colloquially and in WTO practice
and law, such agreements are referred to as regional trade
agreements (RTAs) to differentiate them from unilateral
preferential schemes.

By the end of 2014, 432 RTAs had been
notified to the WTO, of which 238 were in force. In addition, countries have been prolific in establishing bilateral
investment treaties containing rules and commitments that
significantly affect trade in goods, services and technologies,
as well as other terms of further integration of national
economies into global markets. At last count, the world had
in place 3,196 international investment agreements (IIAs):
BITs and “other IIAs”.

Moreover, over 30 new RTAs, involving
more than 110 countries, are currently under negotiation,
with some of them geared to constitute a new order in
international economic governance given their design, content
and quantitative and qualitative weight in the global economy.
Significantly, they involve all the important poles of trade and
investment in the evolving global economy.
Several of these innovative agreements take place between
two or more countries in different regions, or between
countries with RTAs among them and individual countries or
groups of countries in other RTAs.

This type of composition is
not unprecedented, but the trend is now affecting more parties
and happens at a time when the Organisation for Economic
Co-operation and Development (OECD) estimates that
RTAs and IIAs already “cover among their member countries
90% and 60% of cross-border trade in goods and services,
respectively”.4
The last wave of agreements, in addition to
establishing lower applied tariff rates between parties (with the
collateral effect of generally lowering MFN applied rates), have
also added a universe of contractual commitments among
parties on provisions concerning mostly behind-the-border regulatory matters that go deeper than their WTO obligations
(WTO-plus) or that extend the coverage of WTO disciplines
(WTO-beyond or WTO-extra obligations).
The economic significance of RTAs has also been in
crescendo. RTAs of the past may have been defined more
by geopolitics, but the new trend is for a greater emphasis on
commercially meaningful associations that address several
emerging policy concerns. Also, new RTAs are organized
around a set of deeper integration issues that fosters
transnational collaborative production and global value chains.
They could be termed production-sharing RTAs or regulatory
integration RTAs given their emphasis on an increasingly
common and extensive package that in addition to market
access includes services, competition policy, investment
(including capital movement provisions), technical barriers and
regulatory compatibility, intellectual property protection and
customs cooperation. By their nature, at this time, trends in
integration reflect three types of dominant RTAs:
a. FTAs of substantive current or potential trade and FDI
value. Examples under negotiation or recently concluded
include US-South Korea; EU-Singapore; EU-Canada; EUJapan;
EU-India; EU-Mercosur; Australia-China; CanadaKorea;
Canada-India; the embryonic CJK; and BITs
between the US and China and the EU and China.
b. Consolidation RTAs, in which existing RTAs are expanded
through new membership or by merging with other
RTAs. An example of a recent effort is the novel Pacific
Alliance which practically fuses and further integrates six
pre-existing FTAs among Mexico, Colombia, Peru and
Chile, with possible extension to Costa Rica and Panama.
The emphasis is on tariffs, services and cumulation of
imports for rules of origin. Another example is the Tripartite
Free Trade Area in Africa, aimed at consolidating three
subregional agreements, i.e. the East African Community
(EAC), the Common Market for Eastern and Southern
Africa (COMESA) and the Southern Africa Development
Community (SADC).
c. Mega-regional RTAs, deep integration partnerships in the
form of RTAs between countries or regions with a major
share of world trade and FDI and in which two or more of
the parties are in a paramount driver position, or serve as
hubs, in global value chains (i.e. the US, the EU, Japan,
China). This category includes ongoing negotiations in the
TPP; the emerging TTIP between the EU and the US; and
potentially the RCEP, between the 10 ASEAN5
countries
and six of its RTA partners: China, India, Japan, South
Korea, Australia and New Zealand. Beyond market access,
emphasis in this integration is on the quest for regulatory
compatibility and a rules basket aimed at ironing out
differences in investment and business climates.

This report’s focus is on this last category, and on the TPP
and the TTIP in particular. They are singled out given their
conformity with criteria that profiles them as a potential new
pillar of trade governance6
, complementary to the multilateral
trade system:
a. The agreement would affect a share of at least a quarter
of world trade in goods and services (TPP: 26.3%; TTIP:
43.6%)7
and of global FDI.
b. At least two economies party to the agreement are hubs
in GVCs as evidenced by their share of trade intermediate
goods and tasks in the region or regions involved.8
c. The agreement’s coverage goes deeper and beyond
existing – 2013 – contractual obligations and disciplines of
the WTO, RTAs and BITs. In this context, the agreement
addresses a minimum of areas and regulatory reform
essential to 21st century world markets such as services,
investment, competition policy, regulatory convergence, the
digital economy and customs cooperation.
d. Parties to the agreement are engaged in multiple RTAs
with third-party economies and enjoy extensive trade
and investment exchange with a significant number of
non-members, making the partnership a potential reverse
trade-diversion scheme.

The Trans-Pacific
Partnership (TPP) and the
Trans-Atlantic Trade and
Investment Partnership
(TTIP) – Key Issues and
Potential Impact on
Members

TPP
The TPP encompasses a number of East Asian and North
and South American countries.

In 2006, Brunei, Chile, New
Zealand and Singapore initiated a four-way FTA, termed the
Pacific-4, with a vision of comprehensive trade liberalization
being implemented by 2015. By 2010, an additional five
countries, the United States, Australia, Malaysia, Peru and
Vietnam, signalled their intention to join the agreement,
leading to the creation of the TPP. Since then, Mexico,
Canada, Japan and South Korea have requested to join
the TPP, and during 2013, existing members approved
participation of the first three candidates in the expanded
TPP (often referred to as the TPP-12).11 By mid-March
2014, South Korea completed the first round of bilateral
consultations with each of the 12 parties. However, at this stage, no additional member would be expected to join before
an agreement is first finalized by the TPP-12.12
The TPP aims to achieve extensive liberalization of both
goods and services, and entails comprehensive coverage
of trade in services, investment, government procurement,
non-tariff measures and many regulatory topics, as indicated
in Box 1. However, as highlighted by the Congressional
Research Service, the 12 countries are economically and
demographically diverse. The US is more than twice as
large as any other TPP country in terms of its economy
and population; there is wide variation in levels of economic
development between member states, and each has
significantly different strategic and economic interests.

Box 1 – The Content of TPP

The following topics are reported to be included in the
ongoing TPP negotiations:

– Market access for agricultural and industrial products.
Parties aim for duty-free access for trade in goods.
They are also dealing with export and import licensing
procedures, customs issues and trade facilitation.

– Services. The agreement would employ a negative list
approach and cover financial services, including insurance
and insurance-related services, banking and related
services, as well as auxiliary services of a financial nature,
to be addressed in a separate chapter.

– Government procurement. Agreement states common
principles and procedures, as well as specific obligations
for conduct of procurement; it aims at comparable
coverage by all members, while recognizing transitional
measures for procurement markets of developing
countries.

– Agriculture, other than market access. It will deal with
sanitary and phytosanitary standards (SPS); tobacco
regulation; and agricultural competition.

– Rules. The TPP will include chapters and provisions
that build on disciplines contained in the WTO’s Uruguay
Round agreements on Technical Barriers to Trade (TBT)
and intellectual property rights (IPR) enforcement. For
example, the TPP TBT text introduces provisions that
would remove restrictions for testing, inspection and
certification services providers, such as in-country
presence requirements. On IP, it would agree to a shared
commitment to the Doha Declaration on TRIPs and Public
Health and include innovative provisions, particularly on
(i) Patents (e.g. available for plants and animals and for
diagnostic, therapeutic and surgical methods for the
treatment of humans and animals and adjustment of the
duration of patents to compensate for delays occur in
the granting process); (ii) Undisclosed data (e.g. exclusive
protection for five years of the pharmaceutical safety
and efficacy information, from the date of marketing
approval, in the territory of a party including similar
protection for safety and efficacy of a product previously
approved in another territory; further protection for at least
three years on new clinical information for the approval
of a pharmaceutical product containing a previously
approved chemical entity including those previously
approved in another territory); (iii) Copyright (e.g. term
Game-Changers or Costly Distractions for the World Trading System? 15
* Excludes USA and Japan
Source: Draper et al., P10-11.
Figure 1. Trade among TPP Member Countries ($ billion), 2012
200
0
700
1200
1700
2200
Trade among TPP Member Countries ($ billion), 2012
Intra-NAFTA trade NAFTA-Japan trade
TPP-NAFTA* TPP-Japan* Intra-TPP trade*
58%
12%
11%
10%
9%
of protection in the case of juridical persons of 90-120
years compared to the standard of 70 years in TRIPS;
improved legal remedies against the circumvention of
effective technological measures); and (iv) Enforcement
measures (e.g. expansion of existing standards in TRIPS,
ACTA and KORUS on civil and administrative procedures,
including provisional and border measures and criminal
procedures and penalties, namely, in cases of trademark
counterfeiting and copyright or related rights piracy and
misappropriation of trade secrets and a section on internet
service providers). TPP would also include provisions on
biologics and transparency and procedural fairness in
healthcare technologies.

– Rules of Origin: Cumulation of origin. Since many of the
parties to the TPP are trading partners in FTAs, being
part of the TPP implies that inputs originating from a TPP
country that are included in a final good exported by
another TPP nation to a third TPP member are regarded
as originating in such nation. This fosters the participation
of TPP members in regional production networks.

– Investment: Provisions of investment protection, ensuring
non-discrimination, a minimum standard of treatment,
rules on expropriation and prohibitions on specified trade
distortive performance requirements. Also, provisions for
investor-state dispute settlement subject to safeguards to
protect the rights of TPP countries to regulate in the public
interest.

– Separate chapters on labour and environment. On
the latter, it may contain substantive provisions on new
issues, such as marine fisheries and other conservation
issues, biodiversity, invasive alien species, climate change,
and environmental goods and services, in addition to
cooperation for capacity building.

– Other new and cross-cutting issues will include regulatory
coherence; state-owned enterprises; e-commerce;
competitiveness and supply chains; and small and
medium-sized enterprises.

Given the significant economic diversity of member states in
terms of wealth, production structures and strategic goods,
the TPP’s wide coverage requires extensive negotiations
between member states in order to achieve the goal of a
significant and far-reaching agreement. In addition, the goods
sector is being negotiated based on the existence of current
bilateral FTAs. Thus, where FTAs exist between countries,
they are likely to be adopted within the TPP, while countries
without an existing FTA between them have entered into
negotiations on a bilateral basis.14 Meanwhile, other issues are
being negotiated among all participants; yet, the goal remains
a single agreement applicable to all members. This complexity
has some implications for the eventual outcome, and is
discussed further below.

The TPP can significantly impact on global trade dynamics,
given that goods trade among TPP partners amounted
to more than $2 trillion in 2012 (see Figure 1). The North
American Free Trade Agreement (NAFTA) (Canada, Mexico
and the US) and Japan nevertheless accounts for the
largest proportion of this trade, with intra-NAFTA trade alone
amounting to nearly $1.2 trillion in 2012. Bilateral trade
between Japan and NAFTA accounted for close to $250
billion (over 80% of which was between the US and Japan)
of total intra-TPP trade, with Japanese exports to NAFTA
countries accounting for $160 billion.
Trade flows between the remaining TPP-12 members made
up only $180 billion of total TPP trade. Trade between the
remaining TPP-12 members and NAFTA, and between the
rest of the TPP-12 and Japan amounted to $233 billion and
$204 billion respectively.15 Clearly, the NAFTA countries,
particularly the US, and Japan are the key drivers of the
TPP. Indeed, the US and Japan, in line with what has been
suggested by Baldwin (2014) and with evidence generated by
estimating shares of trade in intermediate goods and services
for the US and Japan and partners in the TPP and other
economies in the Pacific basin, drive supply and transnational
organization of production and serve as regional hubs.16
The large number of FTAs being implemented between
Asian and Pacific states also suggests that the effects of tariff
liberalization may be low despite the significant share of global
trade accounted for in this region. Cheong (2013) underlines
the extent to which FTAs may dilute the effect of liberalization
on goods trade, with countries in the Asia-Pacific region
having signed close to 100 FTAs (either bilateral or regional)
between themselves. Cheong (2013) further notes that many
previous studies estimating the effects of regional FTAs in the
region may have therefore over-estimated the gross domestic product (GDP) and trade gains likely to be achieved through
greater regional integration in this region by not taking into
account that goods trade is already significantly liberalized
through the numerous FTAs already being implemented.17 In
terms of goods trade, the TPP faces a similar situation, with
many countries within the TPP already trading under free
trade arrangements.
Cheong (2013) suggests that the gains for member states
from goods trade liberalization through the TPP are likely to be
negligible for most member countries. All countries, with the
exception of the US, Chile and Peru, are likely to experience
a marginal increase in their GDP. However, for all members,
this increase is less than 1%, with New Zealand experiencing
the greatest gain (0.97%) and Canada the lowest (0.02%).
Conversely, the results suggest that the US is unlikely to
experience any change, while Chile and Peru are likely to
experience negligible GDP declines of 0.13% and 0.04%
respectively.18
Estimates from the Peterson Institute for International
Economics suggest the potential impact of the TPP may be
somewhat larger, when including the impact of reducing nontariff
measures.19 The model assumes a staggered approach
to the implementation of the TPP, with an agreement among
the nine original members by 2013 and the three additional
members (plus South Korea20) one year later. Enforcement
occurs one year after the agreement is signed, followed
by five years of implementation. The study finds that by
2025, real GDP will increase by 0.75% for TPP members.
The potential impact on individual countries ranges from
a positive 0.4% impact on GDP for the US to a 13.6%
improvement in GDP for Vietnam. Similarly, exports could
increase significantly, from 2.5% for Chile to 37% for Vietnam.
Vietnam’s gains are expected to arise through its expanded
role as a manufacturing centre of textile and garment
industries.
Cheong (2013) and Williams (2013) both note that many
see the TPP as a stepping stone to the creation of a free
trade agreement among all APEC members, given that
TPP members form a sub-set of APEC. As Williams (2013)
highlights, TPP country trade with the other APEC members
not currently party to the TPP negotiations is larger than
intra-TPP trade, amounting to over $2.7 trillion in 2012, with
China accounting for over 50% of this trade. The creation of
an APEC free trade area (also known as the Free Trade Area
of the Asia-Pacific) would be the largest single market on the
planet, bringing significant gains to member states. Petri and
Plummer (2012) estimate that these gains could amount to
an additional $2 trillion (2007 dollars) by 2025, or an increase
in APEC GDP by 3.5%. The long-term gains from the TPP
for member states may therefore be substantially greater if
this agreement creates a domino effect where all other APEC
members subsequently “fall” into the TPP.

TTIP

The TTIP negotiations, launched in June 2013, aim for a
far-reaching trade agreement between the US and the
EU, focusing on trade liberalization, behind-the-border
and other non-tariff barriers as well as seeking a “high
standards” approach to alignment, compatibility and possible
harmonization of regulations and standards governing the
goods, services, investment and public procurement markets,
as shown in Box 2

Box 2 – The Content of TTIP

TTIP negotiations are organized in three baskets, each
encompassing the following set of issues:

a. Market Access
– Removal of all duties in industrial and agricultural
products, with special treatment for the most sensitive
products
– Rules of origin
– Trade in services, which seeks liberalization in new
sectors, e.g. transport, excluding audio-visual services.

b. Regulations and Non-Tariff Barriers
Parties aim at regulation system compatibility and
alignment, to be achieved by a combination of
simplification and harmonization of procedures for
compliance and regulation-making, and the establishment
of a standing scheme for regulatory cooperation towards
the future. Such a scheme would built on the existing High
Level Regulatory Cooperation Forum (HLRCF) and involve
regulators, the regulated community, technical experts
and other stakeholders. An innovation will seek a common
framework approach on emerging technologies, namely,
e-mobility, nanotechnology and smart grid, and eventually
health IT and cybersecurity.

c. Rules
– Trade defence measures to establish a systematic
dialogue on anti-dumping and countervailing duties
– Investment, with guarantees of protection against
expropriation, free transfer of funds, fair and equitable
treatment and a level playing field for investing
companies, investment protection, including investorto-state
dispute settlement, relevant safeguards and
right to regulate
– Public procurement
– Financial regulation rules
– Intellectual property rights, including geographical
indications – reportedly aiming at further promoting
robust IP frameworks and effective levels of
enforcement with emphasis on the digital environment
and attempts to reconcile their respective regimes on
geographical indications and data flows
– Labour and the environment – innovation includes
illegal logging and illegal, unreported and unregulated
fishing (IUU).

In addition to the above, the agreement would include new
“21st century” issues, e.g. modernization and simplification
of trade-related aspects of customs and trade facilitation;
competition policy; state-owned enterprises; raw materials
and energy; small and medium-sized enterprises; forced
localization of production; and transparency.

MFN tariff regimes in the EU and the US are comparatively
low, as noted by Ecorys (2009), Rollo et al. (2013) and
Fontagne et al. (2013). Fontagne et al. (2013) estimate that
the average tariff protection on EU goods imported by the
US amounts to only 2.2%, while US goods imported by
the EU attract an average tariff duty of 3.3% in ad valorem
equivalent terms.22 It is clear that tariff liberalization, while
forming an important component of TTIP negotiations, is
unlikely to achieve significant economic gains for either the US or the EU, with the exception of the removal of duties on a
comparatively small number of sensitive products.

More significant gains are likely to be made through the
elimination of non-tariff measures and ex-ante and expost
compatibility and alignment of standards regulation
and systems that act as barriers to trade, investment and
public procurement. Many of the non-tariff impediments and
frictions cannot be completely removed (such as geographic,
cultural and language barriers) and both the US and the EU
recognize that there are legitimate philosophical, structural,
institutional and legal differences that have resulted in different
approaches to risk and regulation across the Atlantic.
Still, any progress on compatibility of regulation, through
harmonization or mutual recognition of technical standards,
facilitation of conformity assessments, pre-market or postmarket
oversight, or addressing market access impediments
to providers of testing, inspection and certification services,
can bring about significant reductions in the costs of trade
and investment in both markets and for third-party providers.

Compared to low tariff barriers, Ecorys (2009) and Fontagne
et al. (2013) estimate that bilateral ad valorem equivalent
protection between the US and the EU from non-tariff
measures was significantly higher and ranged between 19%
and 73% across the agriculture, manufacturing and service
sectors. Ecorys (2009) estimated that roughly 50% of nontariff
measures and regulatory differences between the US
and the EU could be eliminated.
The potential impact of the TTIP on the US and the EU
has been evaluated by a number of studies.

The earlier
Ecorys (2009) study suggests that the reduction of nontariff
measures would produce modest improvements in
national income and real wages for the US and the EU,
while changes to total exports could be more substantial. In
an “ambitious” scenario, where 50% of non-tariff measures
and regulatory divergence are eliminated, real income could
increase by 0.3% and 0.7% in the long run for the US and
the EU respectively. In a “limited” scenario (where 25% of
non-tariff measures and regulatory divergence is eliminated) real income in the long term could increase by 0.1% for the
US and by 0.3% for the EU. In the long term, total exports by
the US could increase by 6.1% and 2.7% in the ambitious
and limited scenarios, while EU exports could increase
by 2.1% and 0.9% respectively. More recently, a study
commissioned by the EU, effectively updating and using
a similar methodology to that of Ecorys (2009), produced
similarly modest results.23
Fontagne et al. (2013), using a different computable general
equilibrium modelling technique and an alternative estimation
of non-tariff measures, finds that a 25% reduction in non-tariff
measures coupled with a full reduction in tariff duties could
produce a 0.3% increase in the GDP of both the EU and
the US over the long run. The volume of total exports could
increase more significantly in the long run, by roughly 10%
for the US and by approximately 8% for extra-EU exports.24
In contrast to these studies, Felbermeyr et al. (2013) use for
the Bertelsmann Institute a gravitational econometric model
approach to estimate the size of protection from non-tariff
measures. They find that the implementation of the TTIP may
produce substantially larger economic gains.25 They find that
tariff liberalization could result in a real per capita income
increase of 0.27% for the EU (unweighted mean) and 0.8% for
the US. The impact is much larger under a deep liberalization
scenario, with the full reduction of non-tariff measures. Under
this scenario, real per capita income increases by 13% for
the US and 5% for the EU.

However, the vast difference
in estimated impacts between this study and those noted
previously (including the study commissioned by the EU)
has resulted in the EU suggesting that the Bertelsmann
Institute’s study is based on an untested methodology “that
departs from the standard approach used so far in other
similar studies” and that some of the results produced are
“unreasonable and inconsistent” and “unrealistically high”.

Regardless of one’s view on modelling techniques and
associated results, it is clear that a reduction of non-tariff
measures and regulatory differences will play a much more
significant role in unlocking economic gains for both the US
and the EU than a reduction in traditional tariff duties.